Mortgages for Self-Employed with Bad Credit

Mortgages for Self-Employed with Bad Credit

Obtaining a mortgage as a self-employed individual can already be challenging, but when combined with bad credit, it might feel like an uphill battle. Many mainstream mortgage lenders use automated processes and may reject self-employed applications due to perceived risk. However, securing a mortgage in such circumstances is not impossible.

Challenges for Self-Employed Borrowers with Bad Credit

Self-employed individuals face unique challenges when applying for mortgages, such as the perception that their incomes are unpredictable, which affects lenders’ willingness to lend.

1. Income Verification: Lenders require evidence of steady income, typically through at least two years of accounts or tax returns. Many lenders prefer self-employed borrowers to have been operating for at least two years to qualify for a mortgage.

2. Bad Credit History: Issues such as poor credit score, missed payments, defaults, County Court Judgments (CCJs), or Individual Voluntary Arrangements (IVAs) can raise red flags for lenders.

3. Perceived Risk: Self-employed individuals with bad credit are often seen as higher risk, resulting in fewer lending options or higher interest rates.

What Lenders Look For?

When assessing mortgage applications from self-employed borrowers with bad credit, lenders typically evaluate how stable the applicant’s income has been over time. Additionally, lenders assess how much you can borrow based on a multiple of your annual income. Self-employed applicants’ earnings may also be assessed differently depending on their trading structure, such as whether they operate as a sole trader or a limited company.

Credit History:

• The type, severity, and recency of credit issues.
• Satisfied vs. unsatisfied defaults and CCJs (satisfied credit issues are viewed more favourably).
• Lenders consider unexpected life events as more forgivable than gross financial mismanagement when assessing bad credit.

The Mortgage Application Process

1. Assess Your Financial Situation

• Review your credit report from agencies like Experian, Equifax, or Checkmyfile.
• Checking your credit score before applying for a mortgage is advisable.
• Resolve any outstanding credit issues, such as unpaid defaults or CCJs, where possible.
• Save for a larger deposit (10-25% is often required).

2. Organise Financial Documents

• Gather at least two years of certified accounts. Many lenders prefer self-employed applicants to have at least two to three years of accounts.
• Obtain SA302 forms and tax year overviews from HMRC.
• Prepare bank statements to demonstrate financial stability.
• Applicants will need to submit personal identification and proof of address along with income documentation.

3. Consult a Specialist Mortgage Broker

• A broker specialising in bad credit or self-employed mortgages can help identify suitable lenders and improve your chances of approval. Using a mortgage broker can save self-employed individuals time and prevent unnecessary damage to their credit score from multiple applications.

4. Identify Suitable Lenders

• Many high street banks may decline applications from self-employed individuals with bad credit, so exploring specialist mortgage lenders is crucial.
• If you’re self-employed with only one year of self employment history and have bad credit, several specialist mortgage lenders may consider your application. These lenders are typically more flexible when it comes to both bad credit and self-employed applicants. Here are some specialist lenders that may offer mortgages under these conditions:
  1. Pepper Money – Pepper Money is known for being flexible with self-employed borrowers and those with bad credit. They consider applicants with one year of accounts and may be willing to work with a range of credit histories, including adverse credit.
  2. Norton Finance – Norton Finance works with a variety of lenders who are willing to offer mortgages to self-employed individuals with one year of accounts and poor credit. They focus on finding the right fit for applicants with non-standard circumstances.
  3. The Mortgage Lender – This lender is more open to self-employed applicants and individuals with bad credit. They may offer self-employed mortgages with one year of accounts, particularly if you can show that your business is financially stable and your credit issues are not recent.
  4. Shawbrook Bank – Shawbrook offers self-employed mortgages with a focus on individuals with adverse credit. They may accept one year of accounts if your business can show sufficient income and your credit history isn’t too severe.
  5. Together Money – Known for offering specialist mortgages to people with less-than-perfect credit, Together Money may consider self-employed applicants with one year of accounts and a history of bad credit.
  6. Bluestone Mortgages – Bluestone Mortgages is another lender that may offer mortgages to self-employed borrowers with one year of accounts and bad credit. They have a more flexible approach to assessing financial situations.

  It’s important to consult with a specialist mortgage broker who can help you navigate these options and find the right lender based on your individual circumstances. They’ll be able to guide you through the process and identify lenders who are more likely to approve your application.

5. Submit Your Application

• Provide all requested documents and be prepared to explain the reasons for your bad credit.
• Lenders may require additional information or guarantees, such as a higher deposit or a guarantor.

6. Property Valuation and Approval

• The lender will conduct a property valuation to ensure it meets their criteria.
• Once approved, you’ll receive your mortgage offer.

Tips to Improve Your Chances

1. Improve Your Credit Score:
   • Pay off outstanding debts and avoid late payments.
   • Register on the electoral roll.
2. Provide Accurate Income Records:
   • Ensure your accounts are prepared by a qualified accountant.
3. Offer a Larger Deposit:
   • A deposit of 15-25% can make lenders more willing to approve your application.
4. Work with a Specialist Broker:
   • Brokers understand lender criteria and can match you with the most suitable options.

Conclusion

While obtaining a mortgage as a self-employed person with bad credit can be more complex, it’s achievable with the right preparation and guidance. Specialist lenders and brokers play a key role in helping you navigate the process, ensuring you secure a deal tailored to your circumstances.

By following this guide and working with experts, you can turn your property ownership goals into reality.

Get help from an experienced mortgage broker

You can speak to one of our specialist mortgage brokers who would be able to guide you through the process. They will advise if there is a lender available and the maximum loan amount based on your circumstances. We are a whole of market mortgage brokerage with access to all lenders. Call us on 01332 470400 or complete the form with your details for us to give you a call back.

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